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Water Transfers in the West: Efficiency, Equity, and the Environment (1992)

Chapter: 2 Third Party Impacts and Opportunities

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Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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2

Third Party Impacts and Opportunities

Sooner or later in life, we all sit down to a banquet of consequences.

Robert Louis Stevenson

A water buyer and seller are the two primary parties in a water transfer, each of whom must be satisfied with the results of the negotiations for a transfer to be consummated. These primary parties negotiate in their own best interests and exercise control over whether a transfer will occur. Consequently, their interests are not typically a central concern of public policies governing water transfers. Instead, public policies must be concerned with the interests of so-called third parties, that is, those who stand to be affected by the transfer but are not represented in the negotiations and lack control over or input into the processes by which transfer proposals are evaluated and implemented.

The impacts of transfers and the parties affected are many, diverse, and potentially substantial. Third parties are described in detail in Chapter 4; they can include

  • other water rights holders;

  • agriculture (including farmers and agricultural businesses in the area of origin);

  • the environment (including instream flows, wetlands and other ecosystems, water quality, and other interests affected by environmental changes);

  • urban interests;

  • ethnic communities and Indian tribes;

  • rural communities; and

  • federal taxpayers.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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The types of impacts felt by these parties are quite varied but can be broadly thought of as economic, social, and environmental. Economic effects include impacts on incomes, jobs, and business opportunities. Social impacts include changes in community structure, cohesiveness, and control over water resources, and such changes can occur in both rural and urban communities. Environmental effects are broad based, including effects not only on instream flow, wetlands, and fish and wildlife, but also on downstream water quality and on recreational opportunities that are dependent on streamflows, riparian habitats, and aesthetic qualities.

Because local governments in the area of origin are seldom the buyers or sellers in water transfer transactions, their interests and those of community residents frequently are of concern. Damage to the environmental and aesthetic amenities of natural and rural areas may be significant. For example, transfers that involve surface waters may decrease instream flows, leading to degradation of wetlands and water quality and to loss of riparian habitat. Such transfers also can result in increased sewage treatment costs to municipalities that rely on the depleted streams. Where surface water and ground water are closely linked, the export of ground water also can alter surface flows, with potential adverse effects on riparian vegetation and wetlands. Ground water transfers may lower the water levels in the aquifer, affecting other water users pumping from a common aquifer, drying up wetlands, and altering riparian vegetation and wildlife habitat. Negative effects tend to be most serious when transfers involve moving water from one watershed or region to another. In such instances, the benefits associated with that water are lost to the local area. Fiscal impacts include loss of property tax base and bonding capacity, tighter spending limitations, and reduced revenue sharing.

Water transfers from agricultural to other uses may lead to the retirement of irrigated land. Environmental consequences include soil erosion, blowing dust, and tumbleweeds, which arise after crop production ceases (Woodard, 1988). When farmland is retired from production, the loss of agricultural jobs and related businesses may inhibit future economic growth in the area of origin. When the tax base shrinks, causing local services to decline, the area of origin becomes less attractive to new businesses. Also, water and land resources needed for new local development may be unavailable as a result of major water transfers.

The committee considers voluntary water transfers to be the most promising approach to reallocating water, but it recognizes that voluntary transfers may be related to pressures for involuntary water allocation. Judicial and administrative rulings and water realloca-

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

tions often provide a stimulus for voluntary water transfers. Chapters 5, 8, and 11, which discuss the Truckee and Carson basins in Nevada, the Yakima basin in Washington, and the Imperial Valley in California, respectively, illustrate the relationships between voluntary and involuntary transfers.

Water transfers are viewed by many as a valuable means of meeting the changing water needs of the West, and they are taking place. A recent study, for example, determined that from 1975 to 1984 some 3,853 transfer applications had been filed in Utah; 1,133 in New Mexico; 858 in Colorado; and 42 in Wyoming (MacDonnell, 1990a). The average quantity of water involved in a transfer ranged from roughly 6 acre-feet (7 megaliters (ML)) in Utah to 10 acre-feet (12 ML) in New Mexico and 11.5 acre-feet (14 ML) in Colorado. In contrast, Wyoming 's few transfers tended to involve substantially larger quantities of water, with a median amount of nearly 900 acre-feet (1,110 ML).

In a 1986 survey the Western States Water Council found a wide range from state to state each year in the number of transfers (Johnson and DuMars, 1989). The differences depended primarily on the relationship between unappropriated supplies and anticipated demand. For example, in North Dakota, where unappropriated water has been available to meet new water needs and demand for new uses is low, few transfers occurred. At the other extreme, the survey found that water rights are freely bought and sold on the open market in the rapidly growing states of Colorado, Utah, Nevada, and New Mexico, where hundreds of transfers occur each year. Other studies also suggest that water transfers are increasing in number and are occurring in more areas than previously (Higginson-Barnett Consultants, 1984). These reports indicate that the higher level of transfer activity in some states reflects both the full use of available water supplies and the general level of support for transfers found in state law and procedures (MacDonnell, 1990a).

A 1990 study also found considerable differences among states in transfer approval rates, as well as differences in the number of months taken to make a decision on a transfer application and in the costs incurred by transfer applicants and objectors in the course of the state review process (Colby et al., 1990). These studies raise some concerns about the barriers posed by transaction costs but conclude that current transaction costs do not appear to be excessive in light of the need to protect the expectations of water rights holders sharing a common source of supply. As one report acknowledges, “[p]erhaps the major policy challenge facing the western states in this area is how to address third party effects” such as instream flows, recreation, area-of-origin equity, and water quality associated with the reallocation of western water (MacDonnell, 1990b).

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Water Transfers in the West: A Study of Six States

Western water lawyers have always said that water flows uphill toward money. The shift in water policy from supply augmentation to the reallocation of existing supplies makes it important to know the truth behind this dictum.

Many in the water community believe that the web of transfer procedures and substantive rules imposed to protect junior water rights holders will impede market transfers of water rights. To explore this element of water transfers, the U.S. Geological Survey sponsored a major empirical and analytical comparative study of water transfers in six western states (Arizona, California, Colorado, New Mexico, Utah, and Wyoming) to determine the level of transfer activity, to identify the major legal and institutional factors that influence the efficiency and equity of these transfers, and to measure the transaction costs imposed by the transfer process. This study, The Water Transfer Process as a Management Option for Meeting Changing Demands (MacDonnell, 1990a), has made an important contribution to our understanding of water transfer issues.

The study concludes that existing third party protection rules do not impede transfers, although the time necessary to obtain transfer approval and the costs of this approval can be significant. Despite the imprecise nature of water rights, the study found that a great deal of transfer activity occurs throughout the West, ranging from informal trading of irrigation rights to exchanges, and from temporary transfers to permanent changes of the use and ownership of water rights, depending in part on the availability of unappropriated water in the state.

All states have removed per se restrictions against severing water from the land on which it has been historically used, but legal restrictions still exist in several states, especially on transfers by irrigation water supply organizations. Marginal adjustments in individual state procedures can be made to further facilitate transfers, but the laws as currently written and applied generally support transfers. Most but not all transfers are reviewed by a state agency, or in Colorado by a water judge, and “[t]he approval rate . . . ranged from over 94 percent in New Mexico to about 74 percent in Wyoming. Moreover, actual denials were quite rare in Colorado, New Mexico, and Utah ” (MacDonnell, 1990a). The approval period and transaction costs of the transfer vary considerably among the states, but the costs of obtaining state approval for a transfer, except perhaps in Colorado, generally are not excessive. Thus the study concludes that the most pressing need is not to streamline state transfer procedures, but rather to address the major policy challenge involved in developing broader standards for evaluating third party impacts.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Indeed, arguments favoring voluntary market transfers are tempered by evidence of damage to water rights holders, adverse effects on areas from which the water is taken, impaired water quality, and reduction of instream flows for fish, wildlife, and recreation. These concerns create a dilemma for public policymakers and administrators. Market advocates urge relaxing government restrictions to facilitate markets in water as an alternative to government subsidies and regulation policies, which once were the predominant method of allocating water in the West, whereas others seek greater protection of public interest values not recognized through market mechanisms, leading to greater governmental involvement and increased restrictions on transfers (Graff, 1986; Wahl, 1989). These competing concerns demand innovative responses to balance the economic gains that transfers bring to the water reallocation process against the need to safeguard interests unprotected by the market mechanism. The desire to identify such innovative responses is a primary purpose of this report.

Following a discussion on existing legal protection for third parties in water transfers, this chapter reviews the kinds of third party impacts associated with these transfers, drawing on the committee 's analysis and observations of water transfers. For each group of third parties, it describes different impacts and concerns but does not attempt to evaluate this magnitude or to review methodologies for measuring them. The chapter concludes with examples of how water transfers can be used to mitigate undesirable impacts of existing water allocations and of prior transfers. Thus, although the primary emphasis of the chapter is on the undesirable side effects that may arise as water is moved to new places and uses, the opportunities that transfers present to resolve existing conflicts and accommodate new water needs also is emphasized.

PROTECTING THIRD PARTIES

Chapter 3 examines in detail the legal framework for evaluating proposed transfers and considering potential third party impacts. In general, other water rights holders receive more protection in state review processes than any other third party. Water laws in the western states protect affected water rights holders from damage resulting from changes in use in order to make their rights more secure and valuable. Recent studies indicate, however, that water rights holders entering the process as protestants may incur substantial costs in protecting their rights (Colby et al., 1990).

The laws of some western states allow consideration of the effects

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Transaction Costs: Their Role in Water Transfers

Transaction costs, in the economics literature, are the costs of making a market system work—defining property rights unambiguously enough so that sales can take place, generating information about commodities available, searching for trading partners, negotiating terms of exchange and contract provisions, and enforcing both property rights and contracts to buy and sell. In western water markets, transaction costs are incurred in searching for water supplies and for willing buyers and sellers, ascertaining the characteristics of water rights, negotiating price and other terms of transfer, and obtaining legal approval for the proposed change in water use. This latter category of transaction costs can be called policy-induced transaction costs (PITCs). Transfers participants incur PITCs as they seek to obtain state approval to transfer a water right to a new place and purpose of use. PITCs may include attorneys' fees, engineering and hydrologic studies, court costs, and fees paid to state agencies.

PITCs are of particular interest because they are the focal point of tension between two goals: the need to broaden the range of interests represented in the transfer approval process (which will increase PITCs) and the need to reduce unnecessary impediments to desirable water transfers (which implies a reduction in PITCs).

Several studies provide insights on the magnitude of costs incurred by applicants participating in state review processes. Colby et al. (1990) found that applicants' PITCs averaged $91 per acre-foot ($74 per ML) of water transferred, with considerable variation among states. Applicants' PITCs averaged $187 per acre-foot in Colorado, $54 in New Mexico, and $66 in Utah ($152, $44, and $54 per ML, respectively).

Protests were found to have a significant and positive impact on applicant costs per acre-foot. Time delay, a measure of applicants ' costs of water, was also significantly related to whether or not protests were filed. In Colorado, transfers involving water rights in the most water-scarce areas of the state had significantly higher applicant unit costs and time delays than elsewhere. PITCs are higher where the economic values that may be affected by a proposed transfer are higher—in areas where water is more scarce and water rights sell for a higher price (Colby et al., 1990).

MacDonnell (1990a) also compared characteristics of water transfers in several western states and found considerable variation among states. In Colorado, 80 percent of transfer applications were eventually approved over the 10-year study period (1975 to 1984),

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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whereas 90 percent were approved in Utah and 95 percent in New Mexico. (Approval does not imply that the applicant obtained permission to transfer as much water as originally requested; many approvals are conditioned on modifying the original transfer proposal to satisfy objectors.) One measure of PITCs involves the time delays while waiting for a state agency's decision on a transfer proposal. This period is measured in months from the time a transfer application is filed to the date of the state agency's decision. MacDonnell found that 60 percent of all transfers were protested in Colorado over the period 1975 to 1984 and that it took an average of 21 months to obtain state approval. In sharp contrast, only 5 percent of transfer applications were protested in New Mexico over this same period, and the average time to obtain approval was 5.8 months. In Utah, about 15 percent of change applications were protested, and the average time to obtain approval was 9 months.

One explanation for the variation among states in time delays, approval rates, and frequency of protests lies in the different types of transfers occurring in each state. Transfers out of agriculture often are more controversial than transfers among farmers because of effects on the area of origin and fears of economic dislocation. Transfers out of agriculture account for 80 percent of the transfers in Colorado and only 30 to 40 percent of the transfers that have occurred in New Mexico and Utah over the last 10 years (MacDonnell, 1990a).

of transfers on the special interests of areas of origin and the environment. Most states provide that transfers may be subject to a public interest review (Colby et al., 1990). Indeed, the courts in some states have involved the public trust doctrine to require such consideration even where there is no provision in state statutes. The review process can be expensive; therefore affected parties who do not have the financial means to employ attorneys, hydrologists, engineers, and other experts to substantiate potential damages are unlikely to be effective participants in a review proceeding. Federal and state environmental laws on water quality, wetlands, and endangered species protection also may restrict transfers or increase their costs by requiring that alternative water be provided for environmental needs.

In summary, although some protection exists for parties affected by water transfers, serious questions arise as to the scope of legitimate interests that should be protected, the extent of protection that should be afforded, and how it should be provided.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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RURAL COMMUNITIES

Economic and Fiscal Impacts

The impact of water transfers on rural communities is an issue in several of the cases highlighted in this report. No issue gave the committee more trouble than the question of how to characterize and evaluate the effects of water transfers on small communities. The reason is obvious: no consensus exists within our society about the value of these communities. The communities generally have no legal right because we view them as inferior units of central state governments, and we generally allow the market to dictate their fate. Nonetheless, we do value many rural communities, and we are sometimes willing to buffer them against market pressures. The widespread use of historic preservation controls is one example of such a buffer. As the nation becomes more urbanized and homogenized in the twentieth century, the virtues of rural communities are being extolled with a Jeffersonian fervor. However, many of the justifications for the preservation of rural communities simply reflect an elegiac view of the past that cannot serve as the basis for contemporary public policy. This report does not attempt a comprehensive analysis of the issue of rural community preservation but does suggest processes and factors that can be considered to decide which rural communities should be protected and how this might be done.

Retiring irrigated land can lead to losses of farm jobs, crop production, and farm income. These direct effects can be measured with a fair degree of accuracy. However, indirect impacts of water transfers, such as losses of off-farm jobs, income, and production in nonfarm businesses and households, are more difficult to estimate. Another type of economic impact, “induced impacts,” includes changes in population, employment, and income in local businesses and activities not linked to agriculture but dependent on the vitality of the local economy in general. Retail stores, restaurants, and local services may be affected by a decline in agriculturally linked jobs and income (Charney and Woodard, 1990).

Some economists have argued that water transfers will not impose large and sudden shocks on rural economies because only the marginal lands, those least suitable for crop production and least profitable to irrigate, will be sold and farmers will simply concentrate their efforts on their remaining high-quality lands and most profitable crops. However, there is growing evidence that it is not only the marginal agricultural acreage that is being purchased (Howe et al., 1990). Potential water buyers are willing and able to buy out

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

the properties with the most secure and senior water rights to high-quality water sources, in the most convenient locations, regardless of the crop being grown or farm profitability. In some of the case study areas, particularly Arizona and Colorado, high-value cropland, such as pecan orchards, has been purchased, and more economically marginal grain fields have been ignored. Water buyers seek senior rights to water sources that can be conveyed easily to the new location of use, and generally whole farm operations are purchased, not just less productive portions of farms. The “marginality argument,” which suggests that economic impacts on rural areas will be gradual and occur in small increments, thus appears to be largely baseless.

Although the impacts caused by transferring water formerly used in farming to other areas and uses are difficult to quantify, and may be small in relation to a state's entire economy, they are significant to area-of-origin residents. Although each individual water farm purchase may involve only a small fraction of the area of origin 's total land and water resources, it is important to consider the cumulative effects of such purchases. Factors that make property attractive for water farms in La Paz County, Arizona, have led purchasers to concentrate in a few areas adjacent to aqueducts that can convey water to new uses. This clustering effect also is apparent in the Arkansas River Valley in Colorado. The result is that local economic impacts of transfers are borne by specific towns and counties.

Local economic consequences of water transfers are felt at several different times. Some occur when land and water rights are purchased; others when the land is retired from irrigation; still others when the water is actually transported to a new area. If mitigation requirements are to be effective, they must be timed to remedy impacts when they actually occur. Local government fiscal losses, for instance, may occur well before water is actually transferred out of an area, and thus some earlier event—such as the purchase of land and water rights —must trigger a mitigation requirement for fiscal impacts.

Direct fiscal impacts, including the loss of property tax base and bonding capacity and reduced debt limit and state revenue sharing, occur immediately upon purchase of the land by a municipality or other tax-exempt entity. For instance, one purchase of irrigated farms by an Arizona municipality removed 10 percent of the taxable land in La Paz County, Arizona, from the tax rolls (Nunn and Ingram, 1988). When land purchased for its water rights is removed from the county tax rolls, county tax rates must then be increased, placing a heavier burden on the remaining taxpayers, or services must be cut. At the same time, the county's bonding capacity and legal debt

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

limit, which are based on the county's net valuation, are decreased. Net valuation is also the basis for the distribution of state-shared revenues, particularly the state-shared sales tax. This means that a county receives a progressively smaller portion of state sales tax revenue as municipally owned acreage increases.

Counties having only a small percentage of privately owned land are particularly vulnerable to the fiscal impacts of retiring irrigated land, particularly in areas where lands are acquired by a tax-exempt entity, such as a municipal government seeking new water supplies. In La Paz County, Arizona, 88 percent of the land is federal or tribal, and the state owns an additional 7 percent. This leaves less than 5 percent of county land in private ownership and subject to property taxes. In the late 1980s, 49 percent of this private land was purchased, or was under an option to be purchased, for the appurtenant water rights (Charney and Woodard, 1990).

Direct fiscal impacts also can occur when the buyer is not a tax-exempt entity. When water rights are sold and the irrigated farmland is retired, this typically results in a reclassification and reduced valuation of the land for property tax purposes.

Induced economic and fiscal impacts begin to occur after the farmland is retired. In an area where production in irrigated agriculture is reduced because of water transfers, the farms that remain may be insufficient to support some or all of the local packinghouses and seed, fertilizer, and machinery distributors. Similarly, as irrigated agriculture declines, the community becomes less prosperous, and both the economic infrastructure and the social infrastructure of the community decline. Banks, pharmacies, and other essential firms close. The social structure provided by churches, civic groups, and political organizations weakens at a time when a rural community may badly need a stable, coherent social structure to cope with economic change. The population decreases as reduced job opportunities force people to move from the rural area. If a high enough percentage of the basic industry jobs are lost, the economic viability of the community may be threatened.

One concern focuses on the “ripple” effects of water transfers on communities dependent on irrigated agriculture. Just as investments in irrigated agriculture cause “linked industries” to locate in an area, transfers of water out of agriculture can cause them to leave. The economic consequences that result from disinvestment in irrigated agriculture are multiplied as concomitant disinvestment occurs in industries that support irrigated agriculture. This raises fears that traditional agricultural enterprises and associated lifestyles may no longer be viable.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Economic development is threatened as soon as water rights are sold for use in another area. A further round of impacts is felt when the water actually leaves the area and the reality of the transfer is experienced. The fiscal condition of the rural area deteriorates as direct and indirect effects are realized. A community's ability to attract new enterprises depends on both its tax rate and its spending patterns. The quality of public services, particularly the quality of public schools, is an important consideration when people and businesses are deciding where to locate. Thus, exporting all of the water available to a piece of land not only can foreclose future development opportunities for that land, but also may limit development opportunities throughout the area.

The perceived water supply also is important. If the area of origin has no control over its water supply and is seen as being “dried up,” this perception will impede future development. Tumbleweeds and blowing dust on retired farmlands reinforce this perception (Nunn and Ingram, 1988; Oggins and Ingram, 1990). The availability of developable land also can be impaired if water purchases lock up an area's land base or increase land prices. In many parts of the West, highways, rail lines, and aqueducts run along parallel routes; land purchased for its proximity to possible water conveyance infrastructure may also be the most desirable land for commercial or industrial development.

When assigned a dollar value, the losses suffered by areas of origin may appear insignificant in comparison with the total state economy or even with the substantial benefits of additional water supply that may accrue to the new users of the water. Such losses, however, tend to be concentrated in particular areas and can seriously impair the viability of small rural communities, which may lack the economic strength and diversity to respond to such rapid changes.

Environmental Effects of Retiring Irrigated Farmland

When land is retired from irrigated agriculture, the natural process of revegetation produces a secondary succession of plant species. Succession continues until the plant community has stabilized. Russian thistle (tumbleweed) is the characteristic species in the first phase of secondary succession on abandoned farmland in much of the Southwest. Tumbleweeds are effective in dispersing their seed, and they quickly dominate the land to the virtual exclusion of all other species.

The natural succession process varies with the climate and soil type. Farmland in relatively high rainfall areas and with coarse soils

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

may move past the tumbleweed phase in a few years. But secondary succession is slow on fine-textured soil with low rainfall. In parts of Arizona, for example, little revegetation has occurred on farmland abandoned 20 years ago. Instead, the soil has crusted over in large barren areas where no vegetation can be established, generating nuisances of blowing dust and tumbleweeds. Some rural residents have noted that the value of nearby farmland decreases when adjacent land succumbs to disuse. The negative effects of farmland retirement on wildlife, especially small game, also have been noted (Woodard, 1988).

A significant portion of the Arkansas River Valley of Colorado has been purchased and retired from agriculture by the cities of Aurora and Colorado Springs in order to transfer the associated water rights to municipal uses. The retired farmland was neglected, and local irrigators filed suit against the cities over the environmental and nuisance problems. The court approved a negotiated resolution of the case, calling for a permanent vegetative cover to be established on the land before water is removed for use elsewhere. As a result, a revegetation project is now under way in the Arkansas River Valley, though with limited success (Weber, 1989).

Social impacts caused by water transfers, which are even more difficult to quantify, but no less genuine, include effects on community cohesion, local traditions and cultural values, and the political viability of local governments and irrigation districts in the area of origin. One pervasive effect of water transfers on areas of origin is loss of local self-determination as the future of an area moves beyond the control of its residents. It is this sense of uncertainty, frustration, and vulnerability, as much as the visible, tangible damage, that is fueling the demands for regulation of water transfers from rural areas of the West.

A Cautionary Note on Area-of-Origin Protection

Several factors are relevant to evaluation of the indirect effects transfers can have on rural economics, and these need to be considered before a policy of area-of-origin protection is adopted. First, to the extent that transfers of water are voluntary, the value of the water to the buyer in the new activity exceeds the value of water to the selling farmer. If this were not so, the voluntary sale of the water would not have taken place. Whether this transfer constitutes a net economic gain depends on the area or region in which benefits and costs of the transfer are being compared. Evaluation of the net economic effects of transfers out of agriculture depends on the size of

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

the area in which benefits and costs are considered. A transfer can appear to be negative from a county-of-origin perspective but result in positive net benefits when viewed from a statewide perspective. For instance, one study of the Arkansas River Valley in Colorado found that recent transfers resulted in a net income loss of $53 per acre-foot ($43 per ML) but that the market value of water in the urban areas exceeded $1,000 per acre-foot ($810 per ML) (Howe et al., 1990).

Although water transfers can bring negative effects, it is important to recognize that a dynamic, growing economy depends on processes that allow declining industries and firms to be displaced by growing firms and industries. Recent U.S. experience with the decline of several primary industries in the rust belt is an example. Government does not typically move to protect declining industries or to provide full indemnification to people displaced by industrial decline. Indeed, some government activity itself causes adverse indirect impacts for which compensation is not offered. The case of new freeways that bypass small towns and thereby diminish their economic vitality is but one example. If the economy of the West is to remain vibrant and if national and world demands for food and fiber produced in the West do not grow substantially in coming decades, then some disinvestment in irrigated agriculture is probably inevitable and desirable. Efforts to forestall rather than to effect an orderly transition are likely to be counterproductive in the long run.

AVAILABILITY OF WATER FOR AGRICULTURE

Many farmers fear that once water is transferred out of agriculture, it can never be recaptured. Some believe that the transfer of significant quantities of water to the urban sector would prevent farmers from reacquiring adequate water supplies in the future should irrigated agriculture become significantly more profitable than it is today. This concern arises even when leases instead of sales are contemplated, partially because of a distrust of the contracting process. Many growers believe that courts, state engineers, or boards would be reluctant to displace water from a “higher beneficial use” in the future simply because a lease calls for the water to return to the agricultural sector.

Well-functioning water markets tend to drive up the price of water, benefiting existing agricultural water users who want to sell or lease. But growers who want to purchase more water for farming in the future perceive correctly that higher prices will be a disadvantage to them, and so they oppose transfers in concept.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

ETHNIC COMMUNITIES

Water transfers can affect the cultural integrity of communities such as the Hispanic towns of northern New Mexico and Colorado's San Luis Valley. Although Indian and Hispanic communities present the strongest case for protection, they are not the only deserving water-related communities. There are three primary reasons for their special status. First, these communities are rooted in a specific place and resource base more so than most other communities. Second, these communities have often been deprived of resources in the past. Third, members of these communities are subject to a greater degree of risk if they are eroded. Because they generally lack the political resources to prevent or to rectify these effects, such communities may be unable to survive and their way of life may be jeopardized if water has been bargained away for outside uses. Displaced community members who relocate face unique challenges in adapting to new locations compared to others displaced by changing technology and market preferences.

In many cases, there are strong bonds between water and the cultural values of minority communities. Thus the loss of control over water resources is more than just the loss of control over a resource as a commodity of monetary value; it is also an infringement on all cultural values associated with the water itself (Brown and Ingram, 1987). For instance, as explained in Chapter 7, in northern New Mexico modern water law has been imposed on a centuries-old water management approach (the community-based acequias) to the detriment of acequia integrity and viability. The prior appropriation doctrine is inconsistent with the traditions of the acequias, which hold that communities share both water shortages and surpluses. Thus imposition of the prior appropriation approach threatens the existence of these older approaches.

Loss of local control over water resources also diminishes the opportunity of people to participate in water management, which is a strong unifying bond for many communities. Irrigated agriculture is still seen by many minority communities as offering good economic opportunities and at the same time being culturally compatible with their way of life. The loss of control over water resources, however, forecloses lifestyle choices and economic opportunities that depend on local control over water.

There is some potential legal protection for ethnic communities, such as state public interest criteria. Poor rural communities often do not have the financial resources to gain access to effective legal representation in court and administrative processes. Furthermore,

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
×

such statutes rarely have been used to protect their interests. Consequently, minority groups sometimes view the law as inaccessible or weighted against them and may not participate in legal proceedings even when their interests are at stake.

TRIBES AS SOVEREIGN GOVERNMENTS

Tribal governments have a distinct advantage over non-Indian rural communities in that they own extensive water rights and also have broad legal and political control of their reservation resources. Their sovereignty enables them to prevent disadvantageous transfers and to propose and shape favorable transfers. Thus they can protect their own cultural integrity. However, this authority can be exercised effectively only if they have access to sufficient information and technical expertise to evaluate proposed transactions (Williams, 1990). The Truckee-Carson case study in Chapter 5 is a good example of how a tribal government (the Pyramid Lake Piaute Tribe) influenced basinwide water management.

Even with these governmental powers, there can be significant detrimental effects on tribal communities from transfers among non-Indians. In principle, the rights of Indian tribes are not affected by water transfers or uses by non-Indians. Indian rights generally have early priority dates, and their seniority can theoretically be asserted to defeat existing uses. But, as a practical and political matter, this may be difficult or impossible. Major public and private investments have built up non-Indian dependence on water to which tribes legally are entitled but which they may not be using owing to lack of development activities. Under these circumstances, it becomes extremely difficult for the tribes to put that water to specific uses later in tribal development projects. For instance, some observers speculate that the dependence of southern California and Arizona on much of the water to which the tribes located in these areas are entitled will render it difficult for that water to be reclaimed by the tribes for their own uses. Not only will they have difficulty getting government financing for water development and irrigation projects, but there may also be political pressure against making water supplies available for use on reservations by those who have been permitted to take water in default of Indian uses.

ECOSYSTEMS

The integrity of ecosystems depends on healthy wetlands, riparian areas, estuaries, and associated fish, wildlife, and vegetation. Transfers

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Leasing Tribal Water for Non-Indian Use

Off reservation transfers of tribal water are controversial. On the one hand, many tribes feel that the right to implement such transfers is essential to reap economic benefits from their water rights, in the absence of federal largesse for capital-intensive agriculturaf development on the reservation. Federal funds that were available for decades to support non-Indian irrigation project development during the reclamation era were not, and will not be, available on a comparable basis to tribes, Tribes therefore may look to water leasing as a means to earn capital needed to stimulate reservation economies and afleviate poverty and unemployment.

On the other hand, state water rights holders have become the junior rights holders in many areas where senior rights have been awarded tu tribes* If tribes transfer senior rights tu on- or off-reservation uses other than the existing junior rights holders, the water supplies for non-Indian juniors coutd be disrupted, If tribes may not engage in such transfers, disruption of junior rights merely will be delayed until tribes are financially able to, develop irrigation projects and other on-reservation consumptive uses.

Tribal administration of water use transfers will be challenging, given the many preexisting junior users, However, tribes understandably desire some flexibility to benefit from their wa-ter rights under changing economic conditions. Although tribal agricultural projects and other on-reservation uses can be an important component of reservation economic development, these projects require capital. Given the high economic value of water in some off-reservation uses, water use transfers are an impor-tant means to raise funds for development projects and to achieve the highest and best use of regional water supplies. Policies that limit tribes to on-reservation water uses preclude the ‘use of tribal water to supply growing demands off reservations and deprive both tribes and non-Indians of the benefits of voluntary transfers.

of surface or ground water can have significant impacts on water-dependent flora and fauna within western riverine, riparian, and wetland ecosystems. In the arid West, these ecosystems typically occur in narrow bands along river corridors. Water development over the last century destroyed many of the large wetland complexes located at the terminus of closed-basin river systems. Entire species of plants

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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and animals in the arid West are now threatened with extinction because of the reduction of critical river corridor habitat. At the same time, some irrigation activity actually created small wetlands that rely on the numerous leaks and seeps along earthen conveyance systems. Large riparian trees such as cottonwood and willow also came to grow along some regulated river corridors and conveyance canals. Over time, birds and mammals have become dependent on the wetlands maintained by irrigation return flow. As water is transferred, both the quantity and the quality of the water delivered to these wetlands are likely to diminish.

Several species of large river-inhabiting fish are listed as endangered because their habitat has been reduced and their migratory routes have been blocked by dams and diversions. Examples include the federally listed cui-ui in the Truckee River and the threatened salmon runs in northern California rivers and in the Northwest.

INSTREAM FLOWS AND RELATED BENEFITS

In most states, impacts on streamflows are not routinely considered when a water transfer proposal is evaluated. Thus foregone instream benefits can be a significant third party impact caused by water transfers. As noted earlier, instream flows are vital in preserving fish and wildlife habitat in arid regions. But instream flows are also critical to water-dependent recreation, and these leisure activities draw visitors and tourism dollars to the region. There are essentially four kinds of economic benefits generated by instream flows, each of which can be affected by water transfers (Colby, 1990).

  1. Streamflows benefit recreationists directly. Outdoor recreation in the West concentrates around lakes, rivers, and streams. Adequate streamflows are necessary for boating (especially white water rafting), hunting, bird watching, and other wildlife-related recreation. Studies indicate a significant economic payoff in augmenting stream-flows in low-flow years for recreation, even though augmentation reduces water availability for other uses (Daubert and Young, 1979).

  2. Recreation-related spending contributes to local economies. Dollars spent on boating, fishing, hunting, camping, and equipment support government agencies and recreation-related businesses and stimulate local and tribal economies. Many small towns and Indian reservations rely on water-dependent seasonal tourism as a significant source of livelihood for local residents. Many studies address the local economic benefits of streamflows (Boyle and Bishop, 1984; Cordell et al., 1990; Crandall and Colby, 1991; Stevens and Rosen, 1985).

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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How society values water left in waterways has changed over time. Instream flows are now seen as important for water quality protection, fish and wildlife management, and habitat preservation. Instream flows also are critical to water-dependent recreation, like white water rafting, a significant contributor to many western economies. CREDIT: Friends of the River.

  1. Instream flows generate “nonuser” values. Individuals who do not directly use streamflows for recreation also benefit from instream flows. Preserving a riparian area gives one the option to enjoy it in the future. Choices are often made between an irreversible alternative (or one that is very costly to reverse) —such as drying up a stream environment or flooding a canyon—and the alternative of leaving the stream environment in its current state. The latter alternative is always reversible, because new diversions of water and development projects can be approved later. “Option value” is the benefit of not pursuing the irreversible alternative and thus leaving resource use options more flexible for the future. Willingness to pay for preservation so that one's heirs can enjoy the preserved species or ecosystem is termed “bequest value.” Benefits generated by simply

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Why “Recreation” and “Fish and Wildlife” Need Separate Attention

Water transfers can affect different values in different ways, so the processes used to evaluate proposed transfers must be able to distinguish these different values. When examining the third party impacts of water transfers, the broad term “environment” often is used to encompass many elements, including ecosystem effects, recreation use, fish and wildlife management, and habitat preservation. But combining all environmentally related values into one category dulls the importance of these diverse values. At times, it even lumps conflicting values together. It is imperative to separate “environment” into its varied components to properly analyze the effects of water transfers and to guard against the tendency to focus on one or two proxies for environmental quality.

The components of the natural system affected by water transfers fall generally into two groups—the functions of ecosystems and some human use of these systems. The terms environment or habitat are most accurately used to mean the actual ecosystems that are influenced by a water transfer. These include primarily aquatic and riparian systems, but also may include related uplands.

Water for management of fish and wildlife habitat is another separate environmental interest in any water transfer. Fish and wildlife management implies a human use by certain components of the natural system. These uses, however, are managed, often for economic gains, and the relative amount of hydrological degradation or improvement created by a transfer often is judged against an existing controlled environment rather than a natural biologically diverse system.

Ecosystem preservation is related to aesthetics and wildlife habitat maintenance, and these in turn may influence the recreational value of the system. Recreation is more than a human response to an aesthetically pleasing or healthy ecosystem. Recreational use of river systems often is driven by economics. Boating, white water rafting, fishing, and waterfowl hunting are some of the recreational uses that can be directly influenced by water transfers.

Although it is often convenient to treat all environmentally related impacts under one category, the potential impacts of water transfers on recreational use should be acknowledged as separate from the impacts on fish and wildlife habitats and other ecological concerns.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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knowing a unique site will continue to exist are termed “existence values.”

Nonuser benefits are relevant in valuing instream flows where there are wildlife species whose survival depends on streamflows and also where there are areas whose aesthetic and recreational characteristics depend on free-flowing water. Although nonuser values are difficult to quantify, studies indicate that they are sizable, especially for unique recreational sites and for endangered species. For example, existence, bequest, and option values ranging from $40 to $80 per year per nonuser household have been documented for stream systems in Wyoming, Colorado, and Alaska (Greenley et al., 1989). Although these nonuser values may seem intangible and do not go directly into some individual's or business's pockets, as recreation expenditures do, they are an important economic consideration. Evidence on nonuser values has been important in recent court rulings and settlements in determining damages from oil spills and other environmental disasters.

  1. Streamflows provide water quality benefits. Streamflow levels affect dissolved oxygen levels and other water quality parameters. As streamflows become depleted, water quality standards are more likely to be violated, and municipal sewage treatment plants and industrial dischargers have to incur additional expenses to ensure compliance with national and state standards. A stream 's waste assimilation capacity provides economic benefits related to the cost of treatment that would otherwise be incurred by dischargers and by downstream water users (Young and Gray, 1972). These benefits can be measured and compared to the value of water in off-stream uses such as irrigation. In some cases, instream values can be equal to or greater than water values in consumptive uses, especially in important recreation and wildlife areas (Colby, 1990b).

Failure to consider the whole array of instream and environmental consequences may make a transfer proposal seem much more attractive than it would be if all costs were accounted for. This can result in transfers that actually reduce the economic benefits generated by regional water resources. Although there are inherent difficulties in more fully accounting for these types of transfer impacts, they will prove to be critical as water transfer institutions and public participation processes evolve.

The negative impacts of actions that deplete instream flows have been dramatically demonstrated at Mono Lake, the second largest lake in California. Mono Lake—one of the relatively few, large deep saline lakes in the world—is fed by five freshwater streams. In 1941 the city of Los Angeles acquired rights to divert water from these

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Quantifying Instream Flow

Instream flow refers to that volume of streamflow necessary to maintain a specific instream use, or group of uses, at an acceptable level. Instream flow requirements are tailored to accommodate differences in the hydrologic and morphologic characteristics of individual stream segments. The most desirable instream flow requirement simultaneously satisfies several instream uses and still provides water for off-stream uses.

Planners can identify a base streamflow necessary to maintain fish habitat or forecast the response of fish habitat to naturally occurring or project-induced changes in streamflow, stream temperature, sediment transport, or water chemistry. Many of these methods were developed to resolve conflicts resulting from excessive withdrawal of water for off-stream uses. They began evolving in the 1950s and 1960s, during the most active period of construction of large federally funded irrigation and hydropower projects.

The term “minimum flow” was coined to imply protection of a low-flow level that would either constrain reservoir storage during the spring runoff period or limit irrigation diversion during the low-flow season so that adequate water remained instream. Minimum flows can be reserved to maintain fish populations or levels desired for other uses, such as boating.

Instream flow recommendations should be developed whenever a proposed project or water allocation scenario will alter streamflow, stream temperature, channel structure, or water chemistry, especially when economically significant fisheries or recreational resources are involved. The most essential step in conducting an instream flow study is identifying the purpose of the streamflow assessment—in other words, deciding what specific resources are of concern. The three major purposes for conducting an instream flow investigation are as follows:

  1. to determine the minimum streamflow to be reserved during water allocation proceedings and for water quality enforcement;

  2. to determine seasonal streamflow requirements necessary to maintain, restore, or enhance a particular instream use; and

  3. to evaluate the effects of proposed or existing water developments and water transfers and to identify opportunities for mitigation, restoration, or enhancement of affected instream and riparian resources.

Research is being pursued to quantify instream flow requirements for protecting riparian vegetation and wetlands dependent on streams and water conveyance systems. The quantification of flows needed for rafting and kayaking is becoming an important consideration in operating reservoirs and scheduling releases on western rivers. However, quantifying and administering instream flows are complex and in reality involve far more than simply determining minimum flows. Rather, managers must understand the flow regime, which is more complicated because it involves rates of change in flow and the different timing needs of different uses of the water.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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streams and, eventually, to take virtually the entire flow of the lake's feeder streams. The harmful environmental consequences were known, but it was “the established policy of the state that the use of water for domestic purposes is the highest use of water” (Casey, 1984). Since 1941, the level of Mono Lake has dropped 46 ft (15.3 m), the volume of the lake has been cut in half, and its surface area has been reduced by one-third. Mono Lake's ecological balance has been seriously compromised, and wildfowl populations have been decimated (Botkin et al., 1988; Casey, 1984; NRC, 1987). In recent years, environmental groups have used the public trust doctrine and California fish and game laws to curtail Los Angeles' diversions and to stabilize the lake level.

One study estimated total visitor and nonvisitor benefits from the preservation of Mono Lake levels to be about $40 per California household, well above the cost of 22¢ per household that would be needed to preserve lake levels by replacing the Los Angeles diversions with water from other sources (Loomis, 1987). These figures suggest that the benefits of preservation can significantly outweigh the costs of preservation and have clear implications for California and Los Angeles area water policy decisions.

Contingent valuation techniques can be useful for quantifying environmental values such as resource protection, although anyone using such numbers must be aware of the severe limitations and uncertainties of this method. Attention to the benefits generated by instream flows in the West will help to identify hidden costs in proposed water transfers. State reviews of proposed transfers may continue to favor off-stream water uses if decisionmakers rely on more easily documented economic benefits provided by water for irrigation, energy development, and urban growth. Recent evidence on the economic value of instream water suggests that instream benefits

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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can often exceed the benefits generated by off-stream uses and that economic development in the western states could be enhanced by protecting selected stream segments for recreation, wildlife, and improved water quality (Colby, 1990b).

WATER QUALITY

Typically, state water rights proceedings to review proposed transfers do not deal with effects on water quality because water rights are based on quantity only; water quality control is maintained through separate legal frameworks. Yet water use—where, when, and how water is diverted and applied—can have a profound effect on water quality (Getches et al., 1991). For example, in the San Joaquin Valley in California, inadequate drainage of irrigation return flows led to the accumulation of toxic levels of selenium and the subsequent contamination and closure of Kesterson National Wildlife Refuge (NRC, 1989). Irrigation from the Colorado River and its tributaries affects not only the amount of water flowing downstream, but also its salt content. The Colorado River Compact and a treaty with Mexico addressed water volumes; when quality issues became severe, separate legislation was passed to address salinity. The negative impact of irrigation in Colorado on the quality of water available to the Metropolitan Water District of Southern California was recognized physically but not considered an infringement of water rights. Only after extensive negotiations were the water quality implications of U.S. use of the Colorado River incorporated into international agreements.

The economic importance of the water quality enhancement and assimilative capacity provided by streams is likely to increase as water providers and wastewater treatment facilities face more stringent water quality standards. Few studies have estimated the monetary benefits of assimilative capacity. However, Young and Gray (1972) did estimate values for assimilating biological oxygen demand. Other studies indicate substantial benefits to recreationists from maintaining and improving surface water quality in Colorado's South Platte River basin along the populated Front Range (Greenley et al., 1989).

Water quality has a significant impact on the economic value of water rights because it affects the range of different uses to which water can be put and the cost of treating water to provide a quality level suitable for specific uses. In Colorado's lower Arkansas River basin, for example, irrigation companies have had difficulty marketing water for municipal use because of water quality problems. Fort

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Lyons Canal Company and Amity Canal Irrigation Company water is viewed as “unsalable” to cities because contaminants in the water must be removed by reverse osmosis, an expensive process, after transporting water long distances from its current point of use.

Once accustomed to water of a certain quality, municipalities generally consider only water of equal or better quality when searching for new and attractive sources. They pay a premium to ensure that the quality of that source is protected or to secure access to other high-quality sources. For instance, the East Bay Municipal Utility District (EBMUD), which serves more than one million customers in the San Francisco Bay area, relies on the Mokelumne River basin for nearly all of its water supplies. During critically dry years the district has had to implement water rationing and search for additional supplies. The neighboring Contra Costa Water District (CCWD) offered EBMUD use of some of its water from the Sacramento River/San Francisco Bay delta. In spite of its critical shortage, EBMUD preferred not to use this alternative source because it is of significantly lower quality than EBMUD's usual source and its treatment would have stretched the capability of EBMUD's system, which was designed only for high-quality sources. Since the early 1970s, EBMUD also has sought to transfer higher-quality water from the American River, consistent with its goal of seeking the highest-quality water available.

An economic methodology known as the “damage avoided approach” can be applied to estimate the economic value of water sources of differing quality levels. For instance, industries that use water high in total dissolved solids typically face higher operation and maintenance costs and a shorter lifetime for the equipment used in processing. The value of better-quality water can be estimated by evaluating the costs that are avoided by switching from a lower-quality to a higher-quality water source (Gibbons, 1986).

Analysis of market transactions involving water sources of differing quality levels also helps to measure the economic value of high-quality water supplies (Colby, 1990b). The cost of treating different water sources to provide a quality level required for a particular use is also evidence of the economic value of clean water.

Water quality does enter into water allocation decisions but generally through the back door. For historical reasons the right is vested in water quantities or flow rates, with quality considerations addressed through regulatory regimes. In a legal and economic context, it would be more rational if quantity and quality attributes were equal partners in the determination of a water right and also in the determination of third party injury when a transfer proposal is being evaluated.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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URBAN INTERESTS

Urban population growth and municipal interests' desires for more water and more drought-proof water supplies are a driving force behind the water transfers discussed in the Arizona, Colorado, New Mexico, Nevada, and California case studies. Urban interests are often the buyers of water and therefore are often primary parties in transfer negotiations. However, urban interests are also sometimes affected by water transfers and by transfer regulations.

A significant proportion of urban water system costs is related to water quality and treatment facilities. To the extent that a transfer affects the quality of a water source for city supplies, an urban area could experience third party effects. This concern emerged in the Colorado case study in instances where cities objected to proposed transfers because they feared that the transfer would affect the quantity and quality of flows for municipal treatment facilities that were designed to cope with a particular quality of water.

Some argue that transfers may promote urban growth because water transfers are sometimes used to provide water service for new developments. During the California drought, some urban residents expressed bitterness over being required to take “30-second showers” and give up their lawns while new houses were being built “down the street,” bringing more people, traffic, air pollution, and so on. Reflecting this sentiment, a popular bumper sticker in San Diego in 1991 read “Stop Growth—Flush Twice.” In fact, however, the evidence seems to suggest that limiting water supplies may not be an effective means of controlling growth (Erlenkotter et al., 1979).

Policies that make it difficult or more expensive to transfer water from an existing user, such as a farmer, to a city can affect the cost of water service for urban residents. If agencies or courts must consider a broader array of third party impacts, the costs to cities of acquiring new water supplies will probably rise and so will household and business water rates. Because of the high value placed on municipal water use, it is unlikely that the additional transaction costs will render many transactions infeasible. Some of the higher costs may be passed on to consumers, but this could actually have positive effects. Studies of urban water demand indicate that city water users respond to rising water rates by cutting back somewhat on water use, especially outdoor uses for landscape maintenance, car washing, and so on. Better water conservation by city dwellers is generally desirable. In the Arizona and California case studies, rural residents voicing concerns about water transfers expressed a view that cities ought

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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to be made to manage more effectively the supplies they already have before they are allowed to buy water away from rural areas. This issue was illustrated most dramatically in the Truckee-Carson case study, where the Pyramid Lake Piaute Tribe insisted that urban areas undertake residential water metering and water conservation as a condition for settling a decades-old dispute over allocation of water. The tribe successfully argued that these conservation measures were reasonable if urban areas expected the tribe to compromise on its own water use priorities.

FEDERAL TAXPAYERS

Federal taxpayers historically have borne the costs of federal subsidies for western irrigation development and crop production. Presumably, consumers throughout the nation have reaped some benefits in terms of lower food prices and western regional economic development, although it is doubtful that the national ledger is balanced. The era of subsidized water development is ending, but the federal government continues to be involved in western water management and particularly in resolving conflicts over reserved rights and endangered species debates. Federal cost sharing continues to be an important strategy contemplated by local interests trying to resolve tribal claims and other water conflicts. Federal financial participation is an important component of the settlement negotiated in the Truckee and Carson basins and of several recent tribal water settlements in Arizona. Thus federal taxpayers are an affected party in many water transfers.

Taxpayers are affected whenever the federal government participates financially in a water transfer or in resolving conflicts over water claims and whenever federal agency time and expertise are expended. In fact, there was no case study examined by this committee in which federal involvement was absent or peripheral to the issues. Taxpayer dollars are well spent when federal involvement promotes efficient and equitable allocation or helps balance multiple social goals. However, when federal agencies compete against one another, operate only to protect traditional bureaucratic mandates, or fail to facilitate conflict resolution and balanced pursuit of broader social goals, taxpayers' “returns on investment” may be low or negative. Some of the broad social goals that often conflict with one another include promoting low-cost food and fiber production (water subsidies and commodity programs for agriculture), resolving reserved rights claims, protecting water quality and wetlands, and preserving endangered species.

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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OPPORTUNITIES

Transfers should be approached not just as the possible cause of third party effects but also as a potential opportunity to resolve problems with current water allocations and prior transfers. Transfers can be designed to promote not only efficiency but also a broad range of societal interests. If these broader interests are represented, taken seriously, and addressed, there need not be “losers” associated with water transfers. There are many examples of transfers that accommodate these broader interests.

The Metropolitan Water District (MWD) of Southern California's announcement of a major water conservation and marketing agreement with the Imperial Irrigation District (IID) has been hailed as a “win-win” transfer. Under the agreement, MWD agreed to finance improvements in irrigation system water efficiency in return for transfer of the saved water to MWD. The conservation package included the construction of new reservoirs to regulate water flows within Imperial's irrigation system, automated control structures, and the lining of earthen irrigation canals to reduce seepage into the subsurface soils and the Salton Sea. Thus at the same time that irrigation efficiency is improved in the Imperial Valley, urban water supplies will be supplemented for a growing urban population that totals nearly 15 million. (Even this generally beneficial transfer has potential environmental effects that must be weighed, however, such as declining water levels in the Salton Sea.)

In 1979 the Idaho legislature created a water bank to facilitate the temporary transfer of water rights to other water users in a system with a long-term surplus. This approach actually began in the 1930s, when Idaho farmers began “depositing” water allocated to them from federal reservoirs in the upper Snake River system, to be “withdrawn ” by other farmers who needed the water. These deposits and withdrawals were made on a yearly basis under a lease agreement. The water bank created in 1979 to formalize this activity is operated by the Idaho Water Resources Board, which can appoint local committees to oversee the rental of stored water (Johnson and DuMars, 1989). The principal deposits to the bank have come from farmers in the upper Snake River basin with entitlement to Bureau of Reclamation water; the Idaho Power Company has made withdrawals to generate electricity. Both parties benefit, since the farmers are paid for water that they do not currently need and the power company obtains water at reasonable rates to produce electricity, thus saving money for its rate payers.

Water transfers can help preserve and enhance public values. For

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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example, The Nature Conservancy, an international membership organization dedicated to preserving natural diversity, has been acquiring water rights in the West to complement its long-standing programs of purchasing biologically important lands. The Nature Conservancy has developed a number of strategies to acquire water rights to protect instream flows and wetlands. One of these strategies consists of acquiring existing water rights and changing them to instream uses. In so doing, it attempts to acquire generally senior water rights through purchase or donation and then to transfer such senior water rights to instream use. The Nature Conservancy anticipates that this strategy can make a significant contribution to the protection of western instream flows (Wigington, 1990).

One example of this approach to transfers occurred on Colorado's Gunnison River. Under Colorado law, the Water Conservation Board is authorized to acquire and change existing water rights to instream use and to negotiate contractual enforcement remedies with the private parties that offer such water rights to the board. Pursuant to this authority, The Nature Conservancy reached an agreement with the board to donate a significant water right with a 1965 priority date to the board for change to instream use in the Black Canyon of the Gunnison River. The agreement specifies how the instream water right will be enforced against some large junior water rights to divert water out of the river at the Gunnison tunnel, just upstream from the Black Canyon, and gives The Nature Conservancy a contractual remedy should the board fail to enforce or defend the instream water right in general. The instream flow therefore is protected according to priorities established by the appropriation doctrine and is enforceable by both a state agency and a private entity. At the same time, other water rights holders are not adversely affected by the conversion of offstream consumptive uses to instream flows, with the resulting benefits to the recreation and fish and wildlife values of the Gunnison River.

The Nature Conservancy, the Environmental Defense Fund, and other environmental interests are also involved in acquiring existing water rights for wetland uses as part of the solution to the complex problems in the Truckee-Carson case study in Nevada. At the direction of Congress, the federal government also has appropriated money to buy existing water rights that will in turn be dedicated to restoring Stillwater National Wildlife Refuge. Many uncertainties surround the transfer of the Newlands Irrigation Project water rights to wetlands within the refuge because of the many existing water claims and the significant amount of water needed to restore the refuge. Nevertheless, it is clear that any solution that attempts to accommo-

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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date the new uses represented by the refuge and that protects existing uses, including Indian water rights, will rely heavily on market transfers (Tarlock, 1990). These transfers provide opportunities to change past water allocations that did not consider fish and wildlife needs.

A water rights transfer during the energy boom of the 1970s illustrates that rural economies can be protected as water transfers occur. The Intermountain Power Project (IPP) in Utah was designed as a 3,000-MW coal-fired power plant. A site near Delta, a town of 5,000 in west central Utah on the edge of the Great Basin, was selected with the knowledge that water rights would have to be acquired from local irrigators (Clinton, 1990). This longtime agricultural community and the surrounding area are supplied from both ground water and the regulated flow of the Sevier River. Historically, the area used about 150,000 acre-feet (185,000 ML) of water per year for irrigation. The power plant was expected to need about 45,000 acre-feet (56,000 ML) of water per year.

Water rights purchase negotiations began in early 1978. Although individual stockholders of the irrigation companies could have sold water rights to IPP, local leaders organized the stockholders into a unit for negotiating purposes. Although the market price for shares in the ditch companies historically had been in the $300 to $500 per acre-foot ($240 to $400 per ML) range, when the overall negotiations were completed in 1979, IPP paid about $1,850 per acre-foot ($1,500 per ML) of entitlement (Saliba and Bush, 1987).

Because only two units of the power plant are on line, using about 16,000 acre-feet (19,700 ML) per year, approximately two-thirds of the purchased rights of about 45,000 acre-feet (56,000 ML) per year is being leased back for local agricultural use. On average, each farmer received between $100,000 and $150,000, for a total infusion into the local economy of some $80 million. This infusion of capital into the area has had many results. Some farmers used the money to reduce debt; other purchased homes, additional supplies, or equipment; a few sold out and retired. By and large, the capital resources from the water purchases have remained in the local area and served to boost the local agricultural economy. The economy also has been the beneficiary of the jobs and tax base produced by the power plant (Clinton, 1990). The IPP transfer differs from many of the case study transfers that moved water out of agriculture because the water use remained in the area of origin and was leased to farmers, thus preventing sudden reductions in irrigated acreage. These examples indicate the potential of water transfers to address third party impacts and make water available for new uses. They demonstrate that strat-

Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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egies can be implemented to protect affected water rights holders and public interest values that traditionally have not been recognized in market mechanisms.

Money is not always the most appropriate or useful way to characterize the full range of social, political, and environmental effects of water transfers. Interestingly, the courts have ruled in some instances that money cannot be an adequate substitute for “wet water.” For instance, in the dispute between Texas and New Mexico over interstate compact violations on the Pecos River, the court ruled that past violations could be compensated by monetary payments to Texas but that any future violations by New Mexico would have to be paid with water, not money. As another example, tribes are sometimes offered monetary payments as a substitute for wet water delivered for use on reservations, so that non-Indians can continue to use water that would be awarded to tribes. In some cases, tribes have refused, arguing that money is no substitute for water supplies (Sly, 1988).

Policy changes that afford broader protection to third parties generate important benefits by limiting the uncompensated costs that transfers can impose on third parties. However, broader third party protection also means that the transfer review process will likely become more complex and cumbersome, raising the transaction costs incurred by transfer proponents. Recent court rulings and legislative activity in the western states, reviewed in Chapter 3, suggest that policymakers are broadening the protection available, reflecting a growing appreciation of the environmental, recreational, and cultural benefits that water resources provide.

REFERENCES

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×

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Oggins, C., and H. Ingram. 1990. Does Anybody Win? The Community Consequences of Rural-to-Urban Water Transfer: An Arizona Perspective. Issue Paper No. 2. Tucson: University of Arizona, Udall Center.

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Tarlock, A. D. 1990. The role of market transfers in the accommodations of new uses: A case study of the Truckee Carson Basin. In Moving the West's Water to New Uses: Winners and Losers. Proceedings of the 1990 Annual Summer Program. Boulder: University of Colorado, Natural Resources Law Center.

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Wigington, R. 1990. Update on market strategies for the protection of western instream flows and wetlands. In Moving the West's Water to New Uses: Winners and Losers. Proceedings of the 1990 Annual Summer Program. Boulder: University of Colorado, Natural Resources Law Center.

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Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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Suggested Citation:"2 Third Party Impacts and Opportunities." National Research Council. 1992. Water Transfers in the West: Efficiency, Equity, and the Environment. Washington, DC: The National Academies Press. doi: 10.17226/1803.
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The American West faces many challenges, but none is more important than the challenge of managing its water. This book examines the role that water transfers can play in allocating the region's scarce water resources. It focuses on the variety of third parties, including Native Americans, Hispanic communities, rural communities, and the environment, that can sometimes be harmed when water is moved.

The committee presents recommendations to guide states, tribes, and federal agencies toward better regulation. Seven in-depth case studies are presented: Nevada's Carson-Truckee basin, the Colorado Front Range, northern New Mexico, Washington's Yakima River basin, central Arizona, and the Central and Imperial valleys in California.

Water Transfers in the West presents background and current information on factors that have encouraged water transfers, typical types of transfers, and their potential negative effects. The book highlights the benefits that water transfers can bring but notes the need for more third-party representation in the processes used to evaluate planned transfers.

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